Micro, Small and Medium Enterprise. (MSMEs)

Micro, Small and Medium enterprises (MSMEs) have received major relief in the form of a tailor-made stimulus package offered by the Narendra Modi government. The economic shock rendered by the corona virus pandemic has been devastating for these business units whose contribution accounts for close to a third of india’s GDP and provides employment to almost 12 crore persons. To aid the sector combat this unprecedented stock, Finance Minister Nirmala Sitharaman has announced six relief measures as part of a larger Rs 20 lakh crore package. Specific Measure for the MSME sector include collateral-free loans worth Rs 3 lakh crores,subordinate debt provision worth Rs 20,000 crores collateral-free loans worth Rs 3 lakh crores, subordinate debt provision crores inclusive of a partial guarantee
support through the Credit Guarantee Fund Trust for Micro and small Enterprises (CGTMSE), equity infusion of Rs 50,000 crores,revision of the current MSME defination, disallowance of global tenders upto Rs 200 crores in goverment procurement tenders and lastly, payment of outstanding dues to MSMEs, by government/CPSEs within 45 days. The MSME sector is characterised by limited accessibiliry to form al credit and coloured by massive informality, especially with the presence of 6.30 crore micro—units l99 per cent o f the total 6.33 crore MSME units fall within the micro segment, cornprising one—person business units and those t hat employ upto 10 persons. It is a highly heterogeneous set of business units, engaged in rnanufacturing, trade and service activities. It is tirne that MSMEs are accurately profiled through updated, comprehensive information about these unincorporated business units and workers within.

What is apparent is that the extremely large number of rnicro enterprises has been propelled by perverse incentives to remain small. From priority sector allocations to collateral—free loans targeted at the micro segment, it is evident why such units would not prefer to scale. Finance Minister Nirmala Sitharaman, in her speech, highlighted how a big ticket reform to the legal classification of these enterprises would incentivise firms to grow.

Revisiting factors that incentivised enterprises to remain small

In the light of the Finance Minister announcing that the MSME definition revision will incentivise such units to grow, it is important to examine the various factors that have led to the micro segment ballooning over decades.

The complexity of labour laws and regulations have been responsible for the creation of dwarf entities in India. It is estimated that there exist as many as 165 labour laws including 50 central laws. A plethora of legislations kick into effect on the basis of the number of employees an entity employs with differing compliance requirements. For instance, the Trade Unions Act, 1926 can be implemented when an entity employs seven or more workers, while the Factories Act, 1948 finds applicability when the number of employed rises to 10, and Employees Provident Fund and Miscellaneous Provisions Act, 1952 is attracted when the number of workers employed rises to 20.

Further, retrenchment of workers is extremely tricky as the dismissal of a worker in a factory and certain other specified establishments with more than 100 or more workers requires the approval of the concerned labour department. The costs of statutory compliance have been noted to be among a significant constraint in Indian MSMEs remaining small in scale and largely informal with some estimating that formal sector entities require to meet 3,000 plus annual filings alongside 60,000 plus items of compliance. The costs for an establishment, per worker, is estimated to increase by 35 per cent due to the range of regulations that find applicability once an establishment has 10 or more workers.

It is no surprise then that most MSMEs in India employ upto 10 workers, especially the 6.30 crore micro-units. Importantly, these costs are noted to be the highest for privately owned establishments thus acting as a barrier for establishments achieving scale.